5 Min Read
* Foreign minister quits, day after finance minister
* Coalition stability in question as PM Coelho raises stakes
* Populat discontent grows over cuts required by bailout
By Axel Bugge and Andrei Khalip
LISBON, July 2 (Reuters) - Portugal's prime minister refused to accept the resignation of his foreign minister on Tuesday, raising the stakes in a political crisis that could derail Lisbon's plan to exit an international bailout.
Prime Minister Pedro Passos Coelho told the nation that he would continue to head the government to ensure political stability and would work in coming hours to overcome the crisis sparked by the resignation of Foreign Minister Paulo Portas.
"With me, the country will not choose political, economic and social collapse," Passos Coelho said in a televised address. "There is a lot of work to be done and we have to reap the fruit of what we sowed with so much effort," he said, referring to the swingeing austerity measures implemented under the bailout.
Under Portuguese law, the prime minister can refuse to accept the resignation of a minister.
Coelho's decision puts the responsibility for the government's survival squarely on the shoulders of Portas, who now has to decide whether to stay in his post or pull his rightist CDS-PP party out of the coalition. Without the CDS-PP, the centre-right government would lose its majority.
Finance Minister Vitor Gaspar, the architect of a programme of spending cuts and tax hikes required by foreign lenders as a condition of their support, resigned a day earlier, citing an erosion in support for the bailout.
Passos Coelho has fought tooth and nail to keep his country on a trajectory to exit its 78 billion euro ($102 billion) bailout next year as scheduled, but the measures have pushed Portugal deeper into its worst economic crisis since the 1970s.
"It would be a rushed move to accept this resignation request," said Passos Coelho. "I have not asked the president to remove the foreign minister ... a coalition government cannot be put in jeopardy unless there are enormously serious divergences."
Portas said he was resigning because he objected to the appointment of Treasury Secretary Maria Luis Albuquerque to replace Gaspar.
"The government has fallen apart," said Antonio Jose Seguro, head of the opposition Socialists. "The prime minister has lost all legitimacy to govern."
Portuguese bond prices fell sharply after Portas's announcement, with the returns investors demand to hold 10-year bonds rising 35 basis points. The news weighed on the euro.
"There are increasing reasons to be concerned about developments in Portugal, which has been the 'forgotten country' for much of the (euro zone) crisis," said Alex White, an analyst at J.P. Morgan, in a research report.
"The rug is being pulled out from under the Passos Coelho government and Portugal is now staring at the prospect of early elections," said Nicolas Spiro, managing director at Spiro Sovereign Strategy.
"The back-to-back resignations throw the political opposition to reform in Portugal into sharp relief and pose serious questions about the country's ability to push ahead, let alone exit, its troubled bailout programme."
Lefteris Farmakis, an economist at Nomura Securities, said he did not expect a Greek-style political crisis with radical parties gaining importance.
"The (opposition) Socialists are a mainstream party and they have a strong lead in opinion polls. The outcome of any election would be within the previous political spectrum, not like in Greece, where new forces emerged," he said.
Opposition to austerity has risen steadily this year since the sharpest tax hikes in living memory. There was a general strike last week and leading business confederations have also called for an easing of austerity.
Officials from Portugal's 'troika' of international lenders - the European Union, IMF and ECB - are due to start their next review of the economy on July 15.
Portugal has struggled to meet the terms of its bailout as the recession has deepened, and Coelho has said he may seek a further relaxation of budget deficit limits if the economy worsens further.
The centre-right government has led the country ever since Portugal got the bailout, requested by the former Socialist government before it collapsed, in 2011.